Conjectures on Income Inequality in 2030 … Observations on Human Capital Inequality Today

Colleagues in Chinese Academy of Sciences, Northwest University of Xi’an and others Is it inevitable that Developing Countries that are growing fast and achieve Middle Income status always will continue to grow and become rich, industrialized nations? • In fact, history is littered with a lot of wannabe OECD members: – Argentina … one of the four richest countries in the world in the early 20th century … collapse and stagnation after WWII – Uruguay / Iraq / Venezuela (in the 1960s & 70s) – MORE RECENTLY: • Or … as we are seeing before our eyes: Mexico

Observed Fact:

Association between Inequality and Growth

(as countries attempt to move from middle income to high income) List of Countries/Regions that Have Moved from Middle Income to High Income After WWII [“Graduates”]

East Asian Mediterra- Eastern Others (oil- Countries / nean Europe producing Regions countries excluded) S. Korea Portugal Croatia Ireland Taiwan Spain Slovenia New Zea. Greece Slovak Rep. Israel Hungary Czech Estonia List of Countries/Regions that Have Moved from Middle Income to High Income After WWII and the GINI Ratios (“Graduates”) East Asian Mediterra- Eastern Others Countries / nean Europe Regions S. Korea (32) Portugal (38) Croatia (34) Ireland (34) Taiwan (32) Spain (35) Slovenia (31) New Zea. (36) Greece (34) Slovakia (26) Israel (39) Hungary (31) Czech (26) Estonia (36) List of Countries/Regions that Have Moved from Middle Income to High Income After WWII and the GINI Ratios (“Graduates”) East Asian Mediterra- Eastern Others Countries / nean Europe Regions S. Korea (32) Portugal (38) Croatia (34) Ireland (34) Taiwan (32) Spain (35) Slovenia (31) New Zea. (36) Greece (34) Slovakia (26) Israel (39) Hungary (31) Czech (26) Average Graduates: 33 Estonia (36) Aspiring Middle Income Countries (“Aspirees”) • Argentina • Brazil • Chile • Costa Rica • Malaysia + China • Mexico • Russia • Thailand • Tunisia • Turkey • Uruguay • Venezuela Aspirees Inequality (gini ratios)

• Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) • Malaysia (46) • Mexico (52) • Russia (42) • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44) Aspirees Inequality (gini ratios)

• Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) • Malaysia (46) China: • Mexico (52) • Russia (42) 50 and rising! • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44) Aspirees Inequality (gini ratios)

• Argentina (46) • Brazil (54) • Chile (52) • Costa Rica (50) China: • Malaysia (46) • Mexico (52) 50 and rising! • Russia (42) • Thailand (42) • Tunisia (41) • Turkey (43) • Uruguay (42) • Venezuela (44) Average Aspirees: 47 What is the problem of trying to move from middle to high income with such high levels of inequality?

A lot of it has to do with the slowing growth that occurs during this phase of development … … and the stability of a country [can all individuals share in the rising prosperity … and if they can’t will they take actions that will slow growth further?]

So: China’s real challenge is coming … and there are fundamental questions:

– Can China transform itself like: • South Korea / Spain / New Zealand

– Or  will China become a: • Mexico (now) / Argentina (1960s) Following this logical argument, a lot will depend on the level of income & inequality in the 2020s …

• Japan has survived with zero growth not only due to the fact that per capita incomes were quite high

GDP per capita in Japan1990 > China2025 or so by 40%

• ALSO: Japan’s inequality in 1990 was very low (Gini=31) most Japanese had high income / most “suffered” equally!

In short:

High Income Inequality TODAY

+ Extreme Human Capital Inequality TODAY

= Extreme Income Inequality TOMORROW What will China’s inequality be like in 2025 or so?

• Sure it is high now … but, will it be high when China’s growth slows?

• To examine this question rely, in part, on part of this equation:

Today’s human capital inequality among children (health / nutrition / education) is one of the strongest determinants of tomorrow income inequality

So: What is the nature of China’s human capital today? … in poor rural areas ?

• ≈ 35% of school-aged children in poor rural areas cities

(> 50 million children, ages 6 to 15) other rural

Remember: today’s children are tomorrow workers and professionals … Investments in basic education (continues)

So what is the problem: in fact RURAL EDUCATION was a component of China’s success (during phase I) … problem is: while such a system might make for a fundamentally numerate and literate and disciplined labor force, we believe, while necessary, it is not sufficient to provide the tools for healthy, inclusive phase II development! While all kids do not need to go to college, they should be going to high school … to get basic skills for workforce 20 years from now!! • Going to college … only 2% of students from poor rural areas go to college

• Only 40% of junior high grads in poor rural areas go on to academic high school ..

High School Gap in China today

China in the 2005 Mexico in the 1980s!

100 Percent of students 80 that go to High 60 School 40

0 Large cities Poor rural in China areas Who Does China Look Like? South Korea or Mexico?

South Korea in the 1970s/1980s Mexico in the 1980s! 100100 Percent of 1980s 100 1980s students Today that go to 8080 80 High School 6060 60

4040 40

2020 20

00 0 LargeLarge cities cities RuralPoor Korearural Large cities Rural / Urban inin Korea China areas in Mexico Poor High School Gap in China today

China in the 2005 Mexico in the 1980s! Difference 100 Percent of between Mexico and China? students 80 that go to This gap High 60 represents more School than 100 million 40 children … If Chinese 20 children do not get educated today … 0 what are their Large cities Poor rural options tomorrow? in China areas New study (just finished analysis this past week)

• Vocational Education and Training (VET): – Rich areas (75 VET programs in Zhejiang): • Students are learning vocational skills • Basic academic skills of students are NOT deteriorating – Poor areas (65 VET programs in Shaanxi) • Students are not learning any vocational skills • Math and Chinese skills are deteriorating [Students are NOT learning anything in VET programs] [Students in academic high school (AHS) are learning [-- matching between AHS / VET  VET schools in poor areas are failing!] As a result: drop outs in VET between October 2011 and May 2012

• Results from 2012 REAP survey, 65 VET programs in Shaanxi

Drop out rate Students apparently are understanding that they are 14% 22% learning nothing  Drop out within first 8 months of Average Poorest students VET program Problems are starting before high school

poor quality of education

drop outs Junior High School Student achievement gains (in poor rural junior high schools

Mean Math Achievement Gains By Students' Expected Plans at the Start of Grade 7 .04 .05 0

-.05 -.03

-.1 -.09 -.12 -.15 labor market voc. HS acad. HS undecided (IRT-scaled z-scores) Lots of students had negative or zero gains in achievement! Unsurprising: REAP study shows (in part due to poor quality of education / and rising wages) China’s rural students are not even

getting through junior high school

• Results from 2009/2010 REAP survey

Drop out rate Nearly 40 percent of ? 14% 15% 9% students from poor rural areas are dropping out of JUNIOR HIGH SCHOOL! Grade 7 Grade 8 Grade 9 Maybe the “REAL source” of problem begins before junior high school

• Why? – Poor quality of education in grades 1-9 and before • Poor facilities … teachers … curriculum … • Poor nutrition … Maybe the “REAL source” of problem begins before junior high school

• Why? – Poor quality of education in grades 1-9 and before • Poor facilities … teachers … curriculum … • Poor nutrition / health!!

No matter how much investment into facilities / teacher salaries & training / curriculum … if students are sick or malnourished, may not be able to learn … Is this a problem? Between 2008 and 2012 we tested nearly 40,000 children across China for iron-deficiency anemia In fact, anemia is all over China

Total Total 33.7 Shaanxi—2008 (Dataset 1) 37.5 Shanxi—2009a (Dataset 2) 31.6 Gansu—2010 (Dataset 3) 31.2 Qinghai—2009 (Dataset 4) 51.1 Ningxia—2009 (Dataset 5) 25.4 Sichuan—2010 (Dataset 6) 24.8 Guizhou—2010 (Dataset 7) 33.1 Luo, R., X. Wang, C. Liu, et al. (2011) “Alarmingly High Anemia Prevalence in Western China.” Southeast Asian Journal of Tropical Medicine and Public Health Vol. 42 No. 5

Poor areas of China

Children with anemia (≈ 33%) Children with out ≈ 20 million school aged children are estimated to have anemia … Non-poor areas of China

Children with anemia (≈ 8%)

Children with < 5 million school aged children out (92%) in all of the rest of China Testing 19,500 children in Gansu and Shaanxi Provinces

myopic

normal vision

 2925 (≈15%) were myopic (or nearsighted).

Testing 19,500 children in Gansu and Shaanxi Provinces

myopic

normal vision

 2925 (≈15%) were myopic (or nearsighted). Only 109 had eyeglasses (<0.5%)

THEWe SCOURGE have tested nearly WITHIN: 2000 children for: INTESTINAL WORMS IN RURAL CHINA

Chinese Academy of Sciences Center for Disease Control, Shanghai Stanford University (with support of Asia Health Care Initiative funding)

Incidences of Intestinal Worms, Guizhou Province, 2010

33.9% 40.1% with with worms worms

Without Without

3 to 5 year olds 8 to 10 year olds

Zhang et al., 2011 What are the prospects for China’s inequality in the coming years:

High Income Inequality TODAY

+ Extreme Human Capital Inequality TODAY

= Extreme Income Inequality TOMORROW Thank you